A new year brings on new challenges, and there may be no greater challenge for consumer attorneys than the surprise we found in the tax law passed at the end of 2017. What we discovered was that new law all but eliminated a client’s ability to deduct attorney fees in a consumer case. For more details, read our tax update.
As I hope you know, NACA has been searching for a solution for this now greatly exacerbated problem for several years, albeit with limited success. Right now, we have several paths we are exploring, none of which are a sure thing—but all of which we must pursue. First, we have developed a potential preemptive step that consumer attorneys can take by changing the language of their retainer agreement. In the link above, we describe two possible language tweaks. The first is specific language NACA developed so that attorney fees would not be defined as client income under tax law. We have previously attempted to get the IRS to approve this language through a private letter request, but they chose not to make a ruling, instead letting us know that the issue should be decided by a court. The second possibility is language that mirrors attorney fee language used in legal service retainer agreements. On several occasions now, the IRS (in PLRs) has stated that attorney fee income is not client fee income under when such language is present.
Based on these experiences, we have identified a law school clinic and a tax law firm willing to litigate this issue—not just our retainer language—but the whole question left unanswered by the Supreme Court in Banks of whether statutory attorney fees should ever be taxable. We are specifically looking for a case where the ratio of recovery to fees is such that the net result for the consumer plaintiff is a tax liability exceeding his or her statutory damages recovery (e.g., the client gets a $1,000 FDCPA award and the attorney fee recovery is so high that the resulting tax bill exceeds $1,000). If you have such a case, please let me know as soon as possible.
Finally, it appears that we will have to really make a push for a legislative change. Last year we had a bill introduced, but it went nowhere. This year—with your help—we hope to redouble our efforts to raise the profile of our issue and create momentum for our legislative fix. If you are interested in working on this, please contact me privately.
It’s our hope that we will be presenting a webinar in the next month, going into greater detail about the tax law’s impact. Until then, if you want more information, please feel free to join our Tax Law Community list or contact me privately. I look forward to hearing from you.